UK Gilt poised above succession of bear triggers?

The Gilt remains in a trading range that has dominated the market since June of this year and may yet persist further. But in recent weeks the market has rejected an attempt to break through the highs and is now within striking distance of the lows. Has anything changed or is the market still basically directionless?

The Technical Trader's view

MONTHLY CHART

The market looks poised on the support from the Prior High at 116.08.

DAILY CHART

And the detail of the consolidation suggests a possible complex Head and Shoulders top formation close to completion. Watch for a second close beneath that neckline currently at 115.86

A confirmed completion of that H&S pattern would signal a break of the long-term horizontal support at 116.08.

A second bear short-term bear trigger to watch would be a breakdown beneath the Prior Low at 114.26.

The Macro Trader’s view:

The Gilt remains in a trading range that has dominated the market since June of this year and may yet persist further. But in recent weeks the market has rejected an attempt to break through the highs and is now within striking distance of the lows. Has anything changed or is the market still basically directionless?

We judge the dynamics driving this market may have changed sufficiently for the Gilt to attempt a bearish breakout. The reasons are:

1. The Government singularly failed to tackle in a convincing way the debt build up that has occurred as a result of the recession and fiscal stimulus deployed to contain it.

2. The economy remains in recession. The 3rd quarter was flagged as the moment when growth resumed, it didn’t happen, now all eyes on 4th quarter GDP, but industrial production and manufacturing output has remained surprisingly week, and only today retail sales undershot consensus by a significant margin.

3. The build up of debt needs financing and borrowing cost are set to hit £60.0B, the government has made little mention of this, but it is double the defence budget.

4. The ratings agencies are hovering around the UK’s sovereign AAA rating; so far they have only made reference to what needs to be done, but the inference is that if nothing happens, the rating will be lost, resulting in yet higher interest payments.

So what has supported the gilt over the last few months? Clearly the recession itself offered support in the early stages, as it was judged prudent to use fiscal measures to prevent a financial market meltdown. With growth turning so weak the outlook for inflation relaxed so much that deflation was feared.

The authorities responded with a QE program, designed to support the government debt market and at the same time expand the money supply sufficiently to turn deflation back to mild inflation.

And that policy seems to have worked. CPI, the targeted measure stands at 1.9% against a target of 2.0%. Moreover the Bank of England has forecast it to spike higher over the short term before dropping back.

But over recent months, the Bank’s record on forecasting lower inflation hasn’t been too good. If the spike in inflation doesn’t fall as expected, the market will be exposed to true trader sentiment. The QE program is scheduled to end in February. Then, in an environment where debt is at record levels, inflation is proving problematic, the Pound is weak and growth is barely visible, who would want to buy the gilt?

The only visible support is an election is due in May/June next year. The opinion polls have long forecast a strong Conservative win, but the lead in the polls enjoyed by the opposition Conservative party over the ruling Labour party has started to narrow. Why does this matter?

Well put simply, the main parties have different approaches on how to reduce the deficit. The Conservatives want to slash public spending, which will allow the private sector room to flourish, the Labour government will raise tax, and that will restrict private enterprise, and condemn the economy to years of slow growth making the deficit more entrenched and harder to reduce.

The markets may have traded sideways recently due to expectations of a change of government and policy, but if the opinion poll lead narrows much further, traders could become aggressive sellers of the gilt, and after last week’s pre-budget report we think there are signs that might be starting to happen already.

Mark Sturdy John Lewis

Seven Days Ahead

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US Dollar Bulls Stirring, But Not Yet Wide Awake

The FX Trader’s view - Over the last few months the US Dollar Index has continued to grind lower, recently reaching/eroding a long term 76.4% ‘support’ level. Subsequent to this there has been a positive reaction, with s/term bull signals beginning to mount.

• MONTHLY CHART: The main sign in 2008 that long term bears were losing momentum was the breach of the bear channel top projection. Subsequent resistance was found from the 38.2% recovery level. The 76.4% pullback level is so far having a supportive influence (note this has worked well in EUR/USD too – see last week').
• DAILY CHART: In the FX Specialist Guide we have repeatedly stated that it is possible we have been seeing a third/final downleg (from 81.466 08-Jun high) in the move that commenced from the 89.624 Mar high. The recent violation of the bear channel top is encouraging for early bulls, while a close above the 76.817 03-Nov high now provides an initial bull signal. Recovery through prior 77.428/77.688 lows (with current 23.6% level just above) would provide next confirmation of a temporary Dollar recovery underway, and we could next target the 80.000 38.2% recovery area. S/term dips would be viewed as temporary.

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Pullback in Gold Looks Set to Continue

The Commodity Specialist view - The uptrend in Gold over the last few months was characterized by steady acceleration and muted setbacks. The 27-Nov Dubai sell-off, albeit brief, suggested growing fragility and, after certain Fibonacci projections were reached, the market finally started to let off steam. There should be further downside prior to resumption of the long term uptrend.

• WEEKLY CHART – CONTINUATION: The acceleration upwards in the second half of 2009 recently reached the Fibo projection we had shown in the Commodity Specialist Guide, at 1220, 1.618 swing off prior 1014.60/681.00 2008 downmove. Reaction here has been negative, prompting a pullback phase. On this chart note potentially strong support from the prior highs above 1000.
• DAILY CHART – FEB-10: On this chart the uptrend failed just ahead of a growth projection we had calculated. When the first dual Fibo support just above 1150 was breached a pullback phase was confirmed. The next dual Fibo support just above 1100 is so far being effective, but any s/term strength is seen as temporary ahead of a further slip. The 61.8% & 76.4% bounce levels at 1183 & 1200 should indicate the maximum extent of any s/term recovery. Next target is the lower support area in the 1070s, which includes 50% and 76.4% levels, and 14-Oct high. Ultimately support from around the 1012.90 Feb high should hold, but at present it is hard to gauge whether this will be seen.

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The politics of the Pound v Dollar and Euro

The pre-budget report was never going to announce any measure that risked upsetting the already slim chance of Labour's re-election. The markets seem to understand this and have decided that the Pound should be given the benefit of the doubt with only 5 or 6 months to go until a new government is elected.

Sterling's politics v the Dollar and the Euro.

The Macro Trader's view:

This week's pre-budget report was, broadly speaking, a disappointment. It has been judged broadly fiscal neutral, with all the tough spending decisions deferred until after the General election due by May/June of next year, despite assurances to the contrary by Chancellor Darling.

The headline measure, a punitive tax on Banker's bonuses, is little more than a populist measure designed to please the Labour party faithful and assuage perceived public outrage over bonuses paid to a group of workers whose firms are only still in business because of a tax payer funded bailout.

Why then, is the Pound not under greater selling pressure? The ratings agencies, Moody's in particular, have questioned the sustainability of the UK's AAA sovereign credit rating. The implication is that without a credible deficit reduction plan, the rating could be lost, which would increase the cost of funding the public deficit and make reducing it even harder.

And although Darling claimed in the pre-budget report that the deficit will be halved over the next four years, the statement looks long on aspiration and short on explanation of how it is to be achieved.

In reality, the Chancellor is first and foremost a politician and retaining power is his priority. The ruling Labour party are seriously behind the opposition Conservative party in the opinion polls and look like leaving office after next year's election. The pre-budget report was never going to announce any measure that risked upsetting the already slim chance of re-election.

The markets seem to understand this and have decided that the Pound should be given the benefit of the doubt with only 5 or 6 months to go until a new government is elected. If Labour were unexpectedly to win they would raise tax as a means of cutting borrowing with spending cuts taking less of the strain. If the Conservatives win, they have declared that spending cuts will be their main route to cutting the deficit back sharply. The reason for the Pound’s resilience arises from the polls prediction that they will have a decent working majority.

Yet the Pound’s performances against the Euro and the Dollar are slightly different:

· Against the Euro it has remained within a broad trading range that has dominated since October, and although the Euro zone has already emerged from recession, there are negatives about Euro zone public finances too.

· Against the Dollar the Pound has weakened recently, and looks vulnerable to further selling.

Why the relative weakness against the Dollar (albeit slight) which has been weak itself for so long? The Dollar is currently enjoying a correction that is fuelled by lingering concerns over the Dubai debt rescheduling drama and a stronger-than-expected US non-farm payroll report released last Friday which aroused fears of an early turn in the US monetary policy cycle.

While that has been denied by Fed Chairman Bernanke, the markets are suspicious.

In any case, the US is out of recession whereas the UK is not.

The Technical Trader’s view:

Sterling v Dollar and Euro long-term

WEEKLY DOLLAR / STERLING CHART

In the long-term Cable chart the pressure on Sterling arises from repeated failure at a clear band of resistance

1.6802- 1.7020 throughout 2009.

But there is no completed Top yet in place (that requires a breakdown through 1.5709).

So the market is not immediately in the grip of a medium-term force. (The modest support from the rising diagonal is being tested right now and may provide further clues.)

WEEKLY EURO/STERLING CHART

In the Euro/Sterling, the long-term chart shows the weakness of Sterling from mid 2009 to have arisen from the formation of a continuation pattern a bull falling wedge which completed in September this year.

(Of course, wedges are not the strongest of indicators.)

It would be much clearer for the Sterling bears if the possible Neckline above the market at 0.9380 were to be breached....completing a bull H&S pattern

Sterling v Dollar and Euro long-term

DAILY DOLLAR/STERLING CHART

Short-term, in Cable a small Head and Shoulders Reversal looks to have completed - though we need a confirming close beneath the neckline at 1.6294 today.

The minimum target of that pattern is more or less the critical Pivot at the Prior Low at 1.5709....

DAILY EURO/STERLING CHART

Short-term, against the Euro, the picture is strangely congruent with the long-term chart.

The market is again in the grip of a bull wedge (created, note well, by the solid support from the Prior High at 0.8838).

The Fibonacci 50% resistance may be proving troublesome, in any event, there is no very short-term pattern driving the market

Mark Sturdy

John Lewis

Seven Days Ahead

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EUR/USD Bears Emerging From the Woods?

The FX Trader’s view - The 2009 uptrend in EUR/USD has struggled recently, coinciding with the test of a 76.4% recovery level. There seems to be something in the wind, but the bears need to produce more before we can confidently call for a pullback phase.

• WEEKLY CHART: So far the 76.4% recovery level has provided good resistance, and s/term reaction here has been negative. Support from around the old Dec-08 high has come under pressure.
• DAILY CHART: Breach of a s/term bull channel base provided a preliminary bear sign. And now we wish to see a close below the 1.4623 03-Nov low for a better signal – this would also see violation of the bigger bull channel base. But the 23.6% level at 1.4510 would warn against chasing the market down from these lower levels. However, at that stage we would be assuming that s/term strength was temporary ahead of further bear action.

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Rough Rice Reaches Key Resistance

The Commodity Specialist view - In respect of the current climate conference we take a look at Rough Rice futures (CBOT), with prices influenced by inclement weather – the possible result of climate change. This was recently discussed on CNBC by Mark Sturdy, and those interested may follow this at http://www.cnbc.com/id/15840232?video=1349059964&play=1

• WEEKLY CHART – CONTINUATION: 2009 has been dominated by a recovery in prices. The latest upleg, which broke free of consolidation below 14.00 (now a support area) has reached a zone of key resistance. This includes the old 15.830 Aug-08 low and 16.350 38.2% retracement – a struggle to get through here would not surprise, with a s/term pullback becoming more likely. A later return to strength is expected.
• DAILY CHART – MAR-10: The structure of the last upleg from 13.500 Sep low looks mature, increasing pullback risk – this is emphasised by the current negative RSI divergence. First area of support comes from the dual Fibo retracements, but the stronger area is slightly lower, prior 14.690/14.625/ 14.500 consolidation highs combining with the 61.8% and 38.2% pullback levels to offer potentially strong support. Buyers on dips would favour this area. Note that this key support area falls around 14.00 on the continuation chart.

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Ftse resilient but there may be trouble ahead

The whole Dubai affair proved no more than a storm in a teacup, so is the rally set to continue?

The Technical Trader's view:

MONTHLY CHART

The market's bounce from the lows has been brisk.

Driven latterly by the H&S Reversal.

And the 50% retracement resistance has been smashed....

But note there's the Prior Low at 5301 to overcome. The first solid resistance from old price action that the market has had to deal with. We are testing that level right now.

And, not far above, the impetus from the H&S pattern will peter out as the minimum target is reached.

The market is driving into a band of growing resistance.

DAILY DEC 09 CHART

As the market has approached the long run resistance at 5301, hesitation has been clear.

The bounce back from the recent sell-off has been spirited but notable for the falling volume.

We are genuinely impressed but cautious.

In the short term we need a clear and sustained breakthrough 5386 to get long again

The Macro Trader's view:

The rally in the FTSE that begun back in March of this year, suffered an unexpected setback last week when over two days the market dropped in excess of 250 points in reaction to an announcement by Dubai World that they sought to reschedule US$60.0B of debt due to mature during December.

At first, traders feared the announcement would lead to a debt default dragging the Dubai authorities down with it and through contagion, affect other economies just when global recovery seemed assured.

The main lenders to Dubai world were banks and among those UK banks have a reasonably large exposure. Traders worried that this potential new source of bad debt, would affect lending to other business entities and derail the recovery or worse still force a major bank into bankruptcy.

Fears were somewhat assuaged over the weekend when Abu Dhabi appeared to offer support to the state of the UAE and traders anxiously awaited the start of the new trading week to see how the Dubai authorities would handle the crisis.

In the event, they effectively washed their hands of the whole affair and for a brief period the worst case scenario looked set to unfold, but it didn't. The UAE Central Bank offered emergency liquidity, Dubai World announced it sought only to renegotiate its debt not renege on it, and the financial world breathed a sigh of relief.

The whole affair had proved no more than a storm in a tea cup and even if default had occurred, there is already substantial government support in place internationally for the banking industry, which would have prevented any major bank from going under.

Now equity markets and the FTSE in particular are back focused squarely on the economic outlook for the major economies. While the route back to a strong self-sustaining recovery is still fraught with risks, data continues to indicate that recovery remains on track. Indeed, in the US the Fed's Beige Book released yesterday evening said 8/12 Federal reserve districts showed further modest improvement. Moreover, policymakers have again begun to talk of the need for policy to be pre-emptive.

So last week's sell-off in the FTSE was a correction in what is shaping up to be a solid bull market. It was a correction that was probably due and any one of a number of negative news stories could have brought it on. It just happened to be Dubai grating on nerves still raw after the worst financial crisis in living memory. The market looks set to advance further.

Mark Sturdy,John Lewis
Seven Days Ahead

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Bear Clouds in EUR/JPY Begin to Precipitate

The FX Trader’s view - For the last few months the EUR/JPY cross rate has been range-trading, unable to push above key overhead resistance. Just recently there was a clear break of a key support area, tipping the scales in the shorter term bears’ favour.

• MONTHLY CHART: This year’s recovery failed just ahead of the old highs from 2003/2004 and the 141.00 50% retracement level. Repeated failure to break through this has recently led to an initial bear signal on the Daily chart.
• DAILY CHART: Last week there was finally a clear bear break below key support around the 129.75/130.00 area. This initially opened the way for a test towards the 50% pullback level –but the strength should be there to push lower in due course. Note the lower 1.618 swing projection (from the Oct 129.01-138.51 upleg) around 123.14, for example. Overhead, the 50% bounce level at 132.70 offers possible resistance to a s/term rally – it doesn’t matter that the former key support level has been surpassed by the s/term bounce; the damage has already been done.
• Any sellers into that 50% level would likely have initial stops just above the 135.71 04-Nov high, as a recovery through here would certainly negate the bear analysis.

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Cocoa – Bull Pride Before a Fall?

The Commodity Specialist view - The recovery in Cocoa from its Oct-08 low has been impressive. Interrupted by a period of volatility earlier in the year it has more recently returned to the Jul-08 peak, but displaying short term indecision now.

• MONTHLY CHART – CONTINUATION: In 2008 the sharp drop found good support from near old highs of 2003-2005, with a long term 76.4% retracement level just below. The 3385 peak has been retested, but it is currently unclear if bulls have the will yet to break decisively through.
• DAILY CHART – MAR-10: A preliminary indication that bulls were tiring was the Nov closes below the channel base. This suggested any subsequent rally was more likely to precede another bear leg. In the Commodity Specialist Guide we have been noting the 3360 76.4% bounce level as possible resistance and this has now been tested – we wait to see if bears can re-assert themselves from around here. In any case, the official bear trigger won’t be given unless we see a close below the 3077 12-Oct correction low, which would also violate the 23.6% level of the whole recovery from Nov-08. Next target would then be the 2880/57 area, 38.2% and Feb-09 high.
• In the Guide we had suggested aggressive sellers might favour the 3350 area for entry, stops at 3450. Now achieved, partial profits are targeted around 3100, with stops then reducing to cost. This strategy does, though, pre-empt the required confirming bear break.

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Key Reversal Week in AUD/USD Bearing Fruit

The FX Specialists view - In the FX Specialist Guide we had pointed out a Key Reversal Week that potentially boded bad for bulls. We still believe this to be the case and signs begin to emerge on the Daily chart that back this up.

• WEEKLY CHART: Key Reversal Weeks tend to be more reliable than key reversal days, and we saw one of the former recently in AUD. The current risk is to the downside. On this chart note the first interesting support/target is around 0.8600, the 23.6% retracement.
• DAILY CHART: We have now seen a failure of the shorter term bull channel support today. The confirming signal would be a close below the 0.8905 02-Nov low. In the Guide we had already noted a negative RSI divergence that was heralding bull fatigue. Note lower support coming from the slightly longer term bull channel base at 0.8760 currently, ahead of that 0.8600 23.6% pullback level.
• In the Guide we had suggested sales, on the back of that Key Reversal Week, into 0.9300/20. Those now short will now favour lowering stops to 0.9325, targeting 0.8925 for partial profits. Balances may seek to close nearer to 0.8600 – we’ll review this in due course.
• Note: A recent Key Reversal Week seen in EUR/USD was not considered a strong example of one – and this week it was negated. However, there has been fresh failure close to a long term 76.4% level...

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The surge of the Yen

Why, when the US economy has also emerged from recession and it has a better debt-to-GDP ratio than Japan, has the Yen begun to show such unequivocal strength against the Dollar and also against the Euro and Sterling?

The Macro Trader's view:

The Yen is a currency that has recently benefited from periods of risk aversion. When stocks have been sold the Dollar has rallied on safe-haven buying and the Yen has strengthened too. Even though the Japanese economy has suffered its own damaging recession, traders see the Yen as a refuge from periods of great uncertainty.

Recently, the Japanese economy has begun to recover with the recent release of stronger than expected Q3 GDP but weak spots remain: condo sales have been weaker than expected recently and so too have department store sales.

But the historical strength of the Japanese economy has mostly been due to exported manufactured goods and that remains true today. However, even as recession has been declared over, Japan continues to be dogged by deflation with CPI data released last week showing a decline of 2.4% year on year.

So why, when the US economy has also emerged from recession and it has a better debt-to-GDP ratio than Japan, has the Yen begun to show such unequivocal strength against the Dollar and also against the Euro and Sterling?

The answer is that even though Japan continues to suffer from deflation and the country has a debt-to-GDP ratio in excess of 100% it has a large current account surplus and a trade surplus which means they have few concerns about financing a budget deficit.

The US, on the other hand, not only runs a huge budget deficit, projected to be 12% of GDP or in cash terms US$1.8T with a debt to GDP ratio forecast to hit 70%+ of GDP, but also runs a large trade deficit.

Although this dramatically reduced during the recession, as the US economy has begun to grow again, so too has the trade deficit. For now funding issues are manageable as the outlook for US inflation remains benign and the markets retain confidence in Fed chairman Bernanke.

But China, India and others are not happy. They have massive reserve holdings in US Dollars and Dollar denominated assets, principally US Treasury Bonds. They are unhappy that current US Government economic policies will lead to an erosion of the Dollar's value over time.

The Euro, often touted as an alternative reserve currency, isn't quite up to the role. So the only other currency that offers a safe place to hold reserves is the Yen and this could partly explain the Yen's current strength against the Dollar. Clearly, the percentage of the world's reserves held in Yen remains small compared to the Dollar, but we are talking about diversification, and Gold has also benefited from this. Looking ahead we see a clear trend establishing and the Yen will be the beneficiary.

The Technical Trader's view:

MONTHLY CHART

The failure of the market to get back up through the powerful resistance from the old lows at 101.30 and 101.70 is clear.

A retest of 79.78 is likely...

DAILY CHART

Having driven down through both the near old lows at 88.27 and 88.04 and the pivotal old lows at 87.15 and 87.16, the market has a great deal of resistance above in case of any attempted Dollar rally.

The speed and violence of the move makes it look over-extended.

But the Dollar bears will take great comfort in that overhead resistance.

Mark Sturdy

John Lewis

Seven Days Ahead

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EUA, Carbon Emissions, Favour Short Term Bears

The Commodity Specialist view - Price swings over the last few months have kept the charts in consolidation mode, below a long term key Fibo resistance level. Recent losses have temporarily tilted the scales more in favour of the bears, but losses should prove temporary in the grander scheme of things.

• WEEKLY CHART – CONTINUATION: The 38.2% recovery level has proved a tough barrier to push through, and remains first key resistance on this long term chart. The multi-month consolidation is now seeing more of a sagging in price but this should ultimately be temporary ahead of a later (postponed for now) break above that 38.2%.
• DAILY CHART – DEC-09: This week’s break below rising support around 13.00 confirms that s/term bears are in control. We think that s/term rallies will prove temporary/corrective ahead of further weakness. Resistance-wise first note the prior Oct lows around 14.00 and 61.8% bounce level at 14.06. Then the 76.4% level at 14.43 and falling resistance line just above. The 12.00 area is something of a minimum target (note the small bear channel base just below here). But also keep in mind an interesting Fibo projection at 11.60, currently coinciding with a larger bear channel base – better support could be seen here.
• Ahead of the targets being neared, the ideal sell area looks to be around 14.00, if seen, with stops above the 14.43 76.4% level and falling resistance, say 14.60. 12.50 would be targeted for partial profits, stops reducing to cost. Traders choice whether to target 12.00 or towards 11.60 for more.

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Cotton Bulls Waver At 61.8% Recovery Level

The Commodity Specialist view - The recovery in Cotton from its Nov-08 low slowed during the summer, at one stage suggesting a reversal was in the offing. However, an Oct break to the upside kept bulls on track for the next upside target around a 61.8% recovery level – and now there are indications that a temporary pullback is due.

• WEEKLY CHART - CONTINUATION: Former clear resistance from the Jun-08 low (which coincided nicely with the 50% retracement) was finally broken in Oct this year. The 61.8% level just above 70.00 has now been tested. Note the recent ‘doji’ week on this candle chart, with open and close near the same level suggesting a moment of indecision. Is a temporary pullback phase now on the cards?
• DAILY CHART – DEC-09: Before we turn to the new front month of Mar-10 note resistance from the channel top on the Dec chart (not evident on the new chart) – coinciding with the occurrence of a Key Reversal Day.
• DAILY CHART – MAR-10: Note the 11-Nov bearish Key Reversal Day, which combines with that ‘doji’ week on the Weekly chart and test of 61.8%. A pullback would not surprise at this stage. Initial supports include the 68.40 23.6% pullback, then 67.88/ 67.28 prior highs. Lower support comes from the rising support line and 38.2% level at 64.76. The current pullback scenario would be invalidated on a close above the 74.27 high.
• In the Commodity Specialist Guide we have already suggested aggressive shorts in the 72.50/73.00 area. Initial stops are favoured at 74.75 (catering for a small overshoot), with partial profits targeted around 69.00. With stops then lowered to cost the balance may try and close at/above 65.00.

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USD/CAD – Signs of the Next Bull Leg

The FX Trader’s view - The correction from the 1.3063 Mar high has been deep. Whilst recent support has not come from the most obvious of levels it is still worth looking to see what is now needed to trigger further s/term bull interest.

• WEEKLY CHART: The downmove has so far stopped short of the 76.4% level at 1.0000 (however, there is no requirement that this be reached). Ahead of here support has come from near the 1.0296 Sep-08 low, the take-off point for the last major upleg – it was briefly eroded but a rebound has been prompted.
• DAILY CHART: The initial recovery found clear resistance from the 1.0880 23.6% retracement. It remains the first key resistance, and a close above this would provide a bullish signal. Our focus would then turn to the area of the 1.1124 17-Aug high which currently coincides with a bear channel top projection. Whilst temporary resistance may well be seen here we would expect the recovery to push higher. We are currently leaning towards the idea that the recent pullback was temporary/corrective, ahead of a further upleg.

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Is the Dollar Euro on the turn?

Today Obama seems finally to have woken up to the dangers of running too big a deficit and allowing the national debt to seemingly spiral out of control. He said the deficit needs reducing or else the US runs the risk of a double dip recession.

Fine words, but his policy faces the other way...

The Technical Trader's view:

WEEKLY CHART

The drama of the Dollar lies in the completion of a massive Double Bottom when the market drove up through the 1.4716 level in mid October this year.
Since them of course, the market has hovered above that level, but not departed from it.
The implications of the massive Double Bottom are grave for the Dollar both medium and long-term
The minimum move is up to 1.70.
Through the previous all-time-low of 1.6036.
Now study the pause above 1.4716 to reveal the short-term situation.

DAILY CHART

This view reveals a number of important supports that lie beneath the market.
The Euro bears/Dollar bulls need those to break before getting excited.

DAILY CHART

But this detail is illuminating too.
The Double failure at 1.5062 - so far - is interesting certainly giving rise to bear possibilities - which would be confirmed on a break beneath 1.4650
On the other hand, only a break up through the recent high 1.5062 will get the Euro bulls going.
Watch the short-term price action carefully.

The Macro Trader's view:

The Dollar has been under pressure, principally against the Euro since March of this year, when the worst of the financial crisis was thought to be over and equity markets began to rally. This robbed the Dollar of its safe-haven status and as risk aversion began to ease a little, the Dollar's weaknesses were exposed.

Traders saw the US running up huge budget deficits, adding unimaginable amounts to the national debt and since a US$1.8T budget deficit wasn't just an emergency measure to help stabilize the economy, but part of Obama's economic policy to "remake" the US economy, traders judged the Dollar a sell.

During the Dollar's decline China has voiced dissatisfaction with the Dollar's role as world reserve currency and both she and India have bought Gold in a move to gradually diversify away from US Dollars.

Even while Obama has been visiting China, the complaints from the Chinese side haven't lessened as they accused the Fed of running policy in a way that is fuelling the next big asset market bubble as the Chinese complain the Fed is allowing cheap Dollars to finance riskier asset purchases.

While this is arguably true, the Chinese are no saints and are artificially depressing the value of their own currency.

In recent days Fed Chairman Bernanke saw the need to speak out in the Dollar's defence, something Fed chairmen never normally do since, traditionally, the Fed talks about monetary policy and the US Treasury Secretary talks about the Dollar.

As a result the Dollar gained brief relief before again testing the lows. So today Obama seems finally to have woken up to the dangers of running too big a deficit and allowing the national debt to seemingly spiral out of control. He said the deficit needs reducing or else the US runs the risk of a double dip recession.

Fine words, but his policy faces the other way.

Currently the Dollar is enjoying one of its numerous corrections, but nothing has changed and the Dollar remains a sell against the Euro and other major currencies. That even includes the Pound - despite the UK's own budget deficit and debt problems.

Mark Sturdy, John Lewis
Seven Days Ahead

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The Sterling yield curve

The Short Sterling and Gilt contracts represent two markets reacting to similar concerns, but sometimes moving in opposite directions. Hence the steepening of Sterling's yield curve...

The Technical Trader's view:

WEEKLY CHART DEC10 SHORT STERLING

Few could deny the exuberance of the Short Sterling market - now well above the long- run all-time-highs from February and May this year - they will surely be good support and help ratchet the market better again.

Now contrast that with the DEC11 chart...

WEEKLY CHART DEC11 SHORT STERLING

See how further down the futures curve the current price is far below the highs of Feb this Year.

The market is languishing bearishly rather than making new highs. Now look still further along the yield curve - at the Gilt chart.

WEEKY CHART UK GILT

In February this year the market re-tested the High established in 2003 around 124. Thereafter it fell.

So far it has found support at the 116.08 level.

But notice that there has been no bounce from there.

The market is yet more bearish than the DEC11 Short Sterling. The yield curve is steep and looks set to steepen. Bears should look along the futures strip (and beyond) to establish positions while bulls should buy as close to the Spot Month as possible.

The Macro Trader's view:

The Short Sterling and Gilt contracts represent two markets reacting to similar concerns, but sometimes moving in opposite directions.

The Short Sterling market has remained largely bullish throughout this year, apart from the occasional correction that occurs in any bull or bear market.

Over recent months we have watched as data has turned increasingly bullish of the economy:

1. the PMI Services report began a sustained recovery that now reports sold growth,
2. The housing market defied all predictions of collapse and not only began to stabilize, but is now reporting regular month on month price increases, and
3. Retail sales, while depressed, held up well given the recession. And so developed a view of the economy which expected recovery to emerge sooner rather than later.

So Q3 GDP was a complete surprise to us (and others) when it came in as -0.4%. At first we thought the ONS has made one of its classic mistakes. But the Bank of England's Quarterly inflation report, released yesterday, made no mention of this. Indeed, despite £200.B of QE and interest rates at almost zero, the BoE still forecast CPI below target in two years time.

There is a short term spike to above 2.0%, but policy makers expect that to quickly correct. All of this is based on the current market yield curve, which has priced in a gentle tightening. Moreover it also incorporated the current Government's fiscal tightening plans.

If the opposition Conservative party fulfills opinion poll predictions and wins next year's General election due in May/June, the fiscal tightening on their current plans will be even greater. Clearly on that basis, the outcome for CPI inflation should be even lower, meaning the Bank can leave policy on hold for virtually all of next year.

This offers Short Sterling traders a convergence trade.

The Gilt has all of this to consider, plus the unprecedented debt build up. But the market has traded within a wide range since June. On more than one occasion it has tried to break both the upside, on weak growth, and the downside on debt and future inflation concerns, but has failed to find the impetus to follow through, leaving gilt traders searching for direction

In short, the Short Sterling market is concerned with inflation and how policy is likely to react to it. Since there currently is no inflation there has been no policy response. This allows the bullish convergence trade to cash to take place. But the Gilt is faced with all that, plus a massive debt build up and periodic threats from credit rating agencies to the Sovereign debt rating. The Gilt looks confused short-term, with nothing like the capacity of Short Sterling to rally, yet unable to sell-off.

Mark Sturdy John Lewis
Seven Days Ahead

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US Dollar Index Might Be At Pivotal Moment

The FX Trader’s view - During 2009 the US Dollar Index has enjoyed a deep pullback. Its current position doesn’t exactly excite, but an interesting technical level is being tested and we here highlight what would be taken as the first bull signal.

• MONTHLY CHART: The recovery from early 2008 low found good resistance from the 38.2% retracement. In the process it breached a bear channel top projection suggesting long term bear momentum was waning. Subsequent deep pullback does not invalidate this observation. At this stage we are awaiting reaction after the test of the 76.4% pullback level – these can sometimes be very good supports.
• DAILY CHART: Recent support came from a falling support line here, at the same time as the test of that long term 76.4% level. As we have repeatedly stated in the FX Specialist Guide it is possible we are seeing a third/final downleg (from 81.466 08-Jun high) in the move that commenced from the 89.624 Mar high. At this stage a close above the 76.817 03-Nov high would also violate the small bear channel top projection and provide an initial bull signal. The first hurdles facing s/term bulls would then be prior 77.428/77.688 lows, ahead of the 23.6% recovery level.

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Sugar Bears Still Have Energy

The Commodity Specialist view - A Key Reversal Week in early September, which we highlighted in a previous Update, has provided a bearish backdrop to the technical picture of Sugar. It remains the marker of the end of a previous strong bull run and there is still bear risk.

• WEEKLY CHART – MAR-10: The early Sep Key Reversal Week prompted us to adopt a bearish stance. Subsequent price action has been quite choppy, but we currently seek a bear resolution from this.
• DAILY CHART – MAR-10: We have been viewing any s/term strength as temporary – this is likely to be the case while resistance from the bear channel top around 24.00 and 24.68 19-Oct high stays effective. Next downside target is the 38.2% level. Also note lower support from the bear channel base around 20.00 currently, close to the 19.73 2006 high on the continuation chart. In the Commodity Specialist Guide recently-suggested shorts around 24.00, with initial stops at 25.00, are seeking 21.00 for partial profits with stops then reducing to cost. 20.00 is favoured as a further profit target.

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EUR/USD Bulls’ Unease After Key Reversal Week

The FX Trader’s view - Bulls are on the alert after a recent potential reversal signal on the Weekly chart. But so far not enough has been done on the downside to fully persuade the bears, and the jury is still out, deliberating.

• WEEKLY CHART: Recently there was a type of Key Reversal Week which, admittedly, could have been a clearer one as there was not the clear ‘higher high’ prior to the ‘lower close’. However, we ignore this clue at our peril – it might prove to be a timely marker of a turn in trend. Ideally this would have been seen after a more accurate test of the 76.4% recovery level, but this is not essential.
• DAILY CHART: In the FX Specialist Guide we have been looking at bull channel base projections – the s/term one has not been breached on a closing basis yet, which would be the first bear confirmation. Currently, believers in the Key Reversal indication may try for speculative sales around 1.4950, just ahead of a s/term 76.4% bounce level (61.8% has already been reached, and sometimes this can be a good level in EUR/USD – we are looking at a lower risk entry, but with the chance it won’t be seen). The 1.5061 high offers a nearby risk level for stop purposes. Note lower key support is offered by the prior 1.4446/04 prior highs area, which also incorporates the main 23.6% pullback level and the next bull channel base projection – closing below this would provide a further clear bear sign.

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Natural Gas Pullback – a Temporary Affair?

The Commodity Specialist view - An impressive rally from a September low point has halted medium term bears in their tracks. And in the process an interesting reversal signal has been seen on the longer term continuation chart. The current pullback could prove temporary…

• MONTHLY CHART - CONTINUATION: Note how Sep produced a positive Key Reversal Month, suggesting the bears have had their day. However, this signal was not apparent on the front month charts so should be treated with a degree of caution. Note how resistance has so far come from the 23.6% recovery area.
• DAILY CHART – DEC-09: The break through falling resistance was an encouraging sign for bulls. However, in the Commodity Specialist Guide we had anticipated a deep pullback – which is now occurring. We are currently assuming this will be temporary. 76.4% support is now under test and we wish to await reaction here before contemplating buy strategies – that said the 4.340 04-Sep low does provide a clear and nearby risk level for buyers. (Note that a deep pullback on the continuation chart (not yet seen) would imply new front month lows)

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The alignment of Gold

Gold rallied hard on Tuesday and again on Wednesday, after India announced it had purchased $6.9B worth of Gold Bullion from the IMF, approximately half of the IMF's annual sales.

But why does it matter whether or not India chose to buy Gold from the IMF?

The Technical Trader's view:

DAILY CHART

On the Market Update of 5th October ‘How High Can Gold Go?' We presented this chart.

It shows the Gold price just about to break above a Neckline

We were excited because a Head and Shoulders Continuation pattern was just about to be completed.

As a result we felt the bulls were in charge: medium and long term.

From that H&S pattern and various Fibonacci extensions, we were able to build a series of medium and long-term targets for Gold at 1106, 1210, and 1330.

Now look closer.

DAILY CHART

What happened?

On the 5th October the market had just broken back through the Neckline of the massive H&S pattern.

The market surged ahead in the very short-term and then ground to a halt at the Pivotal Prior high at 1060.

The pull-back found support at the prior High at 1025.

The bounce from that level has driven the market up through the 1060 again - in a typical ratchet-like fashion for a well structured bull trend. 1072 (Prior High) is now good short-term support.

Short, medium and long-term structures are all in alignment.

So we are keen bulls.

The Macro Trader's view:

Gold rallied hard on Tuesday and again on Wednesday, after India announced it had purchased $6.9B worth of Gold Bullion from the IMF, approximately half of the IMF's annual sales.

But why does it matter whether or not India chose to buy Gold from the IMF? Although the sum is significant it is a small percentage of India's reserve holdings, which like most other countries, is mainly denominated in US Dollars.

However, the deal is significant because China also recently announced it had been buying gold over recent years. China has been a critic of the US Dollar as the World's sole reserve currency. So these purchases mark a decision by two of the World's largest and fast developing economies to begin diversifying their reserves away from the Dollar.

China holds in excess of US$1.0T in reserves; India's holdings are not far behind. With no other currency alternative immediately available, the big reserve holder nations such as China, India and the oil exporting nations of the Middle East have only one real alternative and that is Gold.

If this week's actions by India mark a new trend away from the Dollar, then Gold has gained some major support and will surely rally much further. This is so even if India's decision to buy gold this week turns out to be little more than portfolio rebalancing. That is because the Dollar is hampered by the current administration's decision to run massive budget deficits, which are adding hugely to the US national debt.

China has expressed its unease about the Dollar's long term value and the impact further Dollar weakness would have on China's (and India's) reserve holdings. So we view these recent Gold purchases as a clear attempt to begin a move out of the Dollar and would expect to hear news of similar actions from other countries as well as repeat purchases by India and China.

At a time when the economies of the US, UK and Euro zone are weakened and burdened by debt, Gold represents (as it always has) a neutral store of wealth, free from the policies of any one nation. Current western economic policy is geared to prevent financial and economic collapse while fostering economic recovery. If that results in a period of higher inflation, Gold will rally.

So India's purchase of Gold this week is important. We believe it endorses and strengthens our long-term bullish view of this market.

Mark Sturdy
John Lewis
Seven Days Ahead

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Can Q3 GDP re-ignite the S&P?

In the event, Q3 GDP (released today) came in better than expected. Is this number of itself sufficient to re-establish the Bull trend? Probably not. But it does provide a floor to stocks and a cap on the Dollar's recent recovery.

The Technical Trader's view:

WEEKLY CHART

Technically, in the weekly chart, the market is under some strain through the influence of the Gap resistance 1110-1077.
The bull target of the Head and Shoulders pattern is well known to be a good deal higher still at 1250 or so, coinciding with the horizontal resistance from the Prior Lows in March and July 2007.
But the Gap resistance lies in the way.
The bull run since the completion of the Head and shoulder pattern is impressive, with few pull-backs of note.
But it's certainly plausible, still within the context of a medium-term bull market that there may be more of a pull-back even as far as the Neckline currently at about 960 than we have had hitherto.
Look closer for more short-tem evidence.

DAILY CHART

The short-term signals are not good for the market.
The failure to stay above the 1075 level should be a big disappointment for the bulls.
Volumes have been good on down days
The diagonal above the market at 1064 is now first resistance.
And then just above that the old level of 1075 may yet stifle rallies too.
We think the bulls are on the back foot because the market is still vulnerable to any bad news rather than excited by good news thus a retest of the 1011 level is still likely

The Macro Trader's view:

Until last Thursday the S&P 500 looked on course to extend the recent Bull Run, as Q3 Corporate profit reports were largely positive, luring investors back into equities. But the positive tone was undermined by several weaker-than-expected US data releases throughout the week. Moreover, although US Existing Home sales came in better than expected on Friday, ending the week on a positive tone, traders were un-nerved.

With Q3 GDP data due, traders began taking profit and reducing positions, ahead of a number that was widely expected to mark the end of the US recession. But last Friday the UK Q3 GDP came in much weaker than expected. This was contrary to market consensus which was expecting to see confirmation that the UK recession had drawn to a close.

With this in mind, it is understandable why US and global markets generally have experienced an increase in risk aversion. Sentiment hasn't been helped by a weaker-than-expected New Home sales report released yesterday.

But in the event, Q3 GDP (released today) came in better than expected, with most sectors contributing to the recovery. Yet several analysts sought to play down the data by claiming it was achieved solely on the back of fiscal stimulus, mainly the government's ‘cash for clunkers' scheme and tax credits given to first-time buyers.

But Q3 GDP wasn't only boosted by auto sales. Retail sales generally made a solid contribution, as did corporate investment and durable goods via exports, too.

Is this number of itself sufficient to re-establish the Bull trend? Probably not. But it does provide a floor to stocks and a cap on the Dollar's recent recovery.

With several key data releases due next week: ISM manufacturing, ISM non-manufacturing and non-farm payroll, the stage is set, if all goes well, for the Bulls to regain control.

If next week's data is at least in line with, or better than consensus, especially non-farm payroll at the end of the week, we judge stocks should begin to solidly test the highs. Why wouldn't they?

After a good corporate profit reporting season, strong Q3 GDP, additional good news would serve to cement the message in trader's minds: the US economy is on the mend and with the Fed set to leave policy on hold until Q2 2010, traders will have good reason to buy stocks.

Mark Sturdy, John Lewis
Seven Days Ahead

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Confused and Confusing Bond Markets

From June this year US, UK and European bond markets have lacked any bear impetus. Any medium and long-term structures that have developed are far from completion and markets are locked in trading ranges ...

The US, UK and European bond markets have all experienced recent double failures at long-term all-time highs. So the long-term technical outlook is bearish. But those failures occurred nearly a year ago. They have fallen since, but from June this year they have lacked any bear impetus at all. Any medium and long-term structures that have developed are far from completion and markets are locked in trading ranges. Traders should stand aside and await events.

The Technical Trader's view:

WEEKLY UK GILT CONTINUATION CHART

The UK Gilt chart over the two year period since October 2007 shows a steep rally then the market ranging for the last year.
The Double failure at the old all-time-high from 2003 is an unquestionably bearish context.
But the market's difficulty in penetrating back down beneath the Prior High support - which is the lower boundary of the trading range - is clear.
The possible bull channel since June of this year is interesting, and may be a continuation pattern in the making, but that remains conjecture for the moment.

WEEKLY BUND CONTINUATION CHART

The shape of the Bund chart follows that of the Gilt though the parameters of the trading range since last October have been derived from Highs and Lows that have arose at different times.
The clear double failure at the old all-time-high sets the tone of bearishness But medium-term there is less of a bull channel that has been created - more of a tight trading range.
And the market remains squarely within a wider trading range.

WEEKLY TNOTE CONTINUAITON CHART

The US market only bears comparison with the European markets since the beginning of 2009.
After that all three markets have followed each other closely.
The double failure at the old all-time-highs is there as in the other markets. And most recently still, the US has closely matched the bull channel of the UK Gilt market.
But that shows no sign of completing yet.
Traders might well be intrigued by the future possibility of the formation of a second shoulder to a large Head and Shoulders Top formation...but that too is conjecture for the moment.

Mark Sturdy,
John Lewis
Seven Days Ahead

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Medium Term Uptrend in Crude Oil Re-established

The Commodity Specialist view - S/term strength in Brent Crude Oil has put former bears firmly on the sidelines, with new 2009 highs recently seen. Any pullbacks are now likely to be temporary ahead of further upside action.

• WEEKLY CHART - CONTINUATION: Earlier this year the recovery paused ahead of the 38.2% recovery level, but setbacks proved relatively modest. It has been eroded now, and the recent price swings may be viewed as what textbooks refer to as a ‘running correction’ – a sign of strength. The risk is definitely to the upside now, with next focus on the 50% level on this chart.
• DAILY CHART – DEC-09: The slip back from 77.71 Aug high found effective support from our channel base projection (there was dual Fibo support here too). Subsequent strength proved more than a short-lived affair and break above 77.71 implies strength. S/term note resistance from the rising resistance line and slightly higher channel top projection around 81.00 – a pullback would not surprise from here, but the assumption is that it will be temporary and not too deep. The 72.92 17-Sep high offers support, and also note the lower 61.8% pullback level around 70.75 currently – buyers on dips will ideally favour towards this latter level, though no guarantee this will be seen.
• In the s/term, a break through the channel top resistance would first target towards the 85.67 area, 1.618 swing projection off prior 77.71-64.83 pullback.

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Key Reversal Week in GBP/CHF Lures Bulls

The FX Trader’s view - After nearing an interesting Fibo projection earlier this year the GBP/CHF cross rate recovery came to a halt. Subsequent weakness has been quite deep but we have just seen a potentially bullish Key Reversal Week, marking at least a temporary turning point.

• WEEKLY CHART: This year’s medium term bull signal came at the break through falling resistance. This return line now offers support (runs through the 1.5700 area currently). However, last week saw a bullish Key Reversal Week which favours at least a s/term recovery now.
• DAILY CHART: After failure just ahead of the Fibo projection support has come after erosion of the 61.8% pullback level. Note how the lower 76.4% coincides with the 1.5842 Mar low (this has a bearing on that Fibo projection). The break of the 23.6% bounce level is encouraging and, with the Key Reversal Week in place, we view s/term dips to be temporary ahead of further strength. The 1.6873 38.2% level becomes next target, but key resistance lies higher at 1.7346/1.7379, 61.8% and 13-Jul low. Note that we can’t say if this is a major turnaround yet.
• Buyers on dips will ideally favour a pullback towards the 61.8% retracement, so just around 1.6350/40 currently, with initial stops ideally just below 1.6100. A suggested target of 1.6850 for partial profits, then raising stops to cost. Further profit-taking would be wise ahead of that key 1.7346/79 resistance (no guarantees this can be reached, of course).
• Note that a reverse situation presents itself in EUR/GBP. Our Update of 9th Oct, with a bearish ‘warning’, looks to have been appropriate if not spot on with its timing.

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Copper Bulls Stay Sidelined – Downside Risk Remains

The Commodity Specialist view - The 2009 bull run ran out of steam in August, with price action turning consolidative. After an initial negative sign the bears have been reluctant to follow through, but downside risk stays present.

• WEEKLY CHART - CONTINUATION: Recovery from the 1.2475 Dec-08 low has now reached/eroded the old 2.8500 Dec-07 low. Beyond this lies the 61.8% 3.1155 retracement level –but there is currently pullback risk.
• DAILY CHART – DEC-09: Earlier on we had a Fibo projection marked in – it has provided effective resistance, prompting s/term correction/ consolidation. So far, it has shied away from the 23.6% level of the upmove from Dec-08 low, around 2.5935. The s/term rising support/return line is providing approximate resistance and, at the moment, current strength may still prove to be the precursor to another bear leg. Below the 23.6% level note lower support is offered by the 2.4680 Jun high, but the next bear target would be the 38.2% 2.3485 retracement area.

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Short Term Bull Signal in USD/JPY Now Seen

The FX Trader’s view - The recent downtrend in USD/JPY has been trying to find support above the prior lows of Dec-08/Jan-09. It looks as though a s/term recovery signal has now been given, and it is now time to look at some of the overhead hurdles confronting the s/term bulls.

• WEEKLY CHART: The recovery seen earlier this year came to a halt close to the 101.66 61.8% retracement. Currently a recovery above the main falling resistance line, and then 97.78 Aug high, is needed to clear the way for any longer term bulls. Meanwhile the market is trying to find s/term support at/above the 87.11 low.
• DAILY CHART: In the Commodity Specialist Guide we had a Fibo projection around 88.00 (1.618 swing off prior 91.72/97.78 upswing) which has provided good s/term support. Our initial bull sign was to be a close above the 90.30 23.6% level, which has now been seen. We also note a recent positive RSI divergence. The 91.72 13-Jul low and 38.2% level offer next resistance, followed by the 92.88 50% level – a reasonable near term target. However, the more interesting resistance isn’t seen until the bear channel top projection at 94.70 currently. In the Guide we are now buyers on dips back to the 89.00 area, initial stops just below the 87.98 07-Oct low, targeting a modest 91.50 for partial profits.

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Does the S&P remain good value?

The S&P has enjoyed a sustained rally since March and although there have been periodic corrections driven by doubts over the durability of the fledgling recovery, traders have on each occasion overcome their anxiety and the rally has extended. But having risen 64% from the lows seven months ago is it over-extended?

The Technical Trader's view :

WEEKLY CHART

We remain bulls of the S&P.
The market has been driven better by the Head and Shoulders Reversal in place.
But there is more to go - just 50% of the minimum move has been achieved.
There has been a slight pause at the Gap resistance at 1110-1077.
But now the market appears to be penetrating that resistance.

DAILY CHART

The day chart suggests a solidly-constructed bull trend.
The Prior High at 1011 was good support.
And now the recent High at 1075 has been overcome with an encouraging surge of volume.
That should act as good support and ratchet the market higher still.

The Macro Trader's view:

The S&P has enjoyed a sustained rally since March and although there have been periodic corrections driven by doubts over the durability of the fledgling recovery, traders have on each occasion overcome their anxiety and the rally has extended.

More recently the market suffered another correction after a disappointing ISM manufacturing survey and non-farm payroll report earlier this month, which again raised fears about the staying power of the recovery.

These fears were short-lived. The more important ISM non-manufacturing survey released the next week, beat consensus and showed the service sector of the economy was once again expanding.

Earlier this week another potential hurdle was successfully overcome when retail sales came in better than expected. The expectation in the market was for a steep contraction on the month resulting from the Government's cash for clunkers scheme expiring.

In the event, while a negative number was reported, it was better than consensus and the ex-auto version was in positive territory, offering hope that the consumer remains willing to spend.

But as we are now into the Q3 corporate reporting season, traders are more inclined to react to high profile corporate results, than Macroeconomic data. But here too, the news so far is good.

Apart from some solid results released by non-financials, the S&P has risen on strong profit reports from J P Morgan Chase. Today, Goldman Sachs had stronger-than-expected results.

This is not only good news for shareholders but also for the economy, since as the leading financial institutions repair their balance sheets and profitability, their appetite for advancing new lines of credit will grow. This will feed the recovery and, in turn, feed equity markets.

So although the S&P has done well to get to current levels, we judge the signs are encouraging and it should rally further.

Mark Sturdy, John Lewis
Seven Days Ahead

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How high can Gold go?

The Technical Trader's view:

QUARTERLY CHART

The big picture of the market is familiar: in the seven years to March 2008 the market surged from $255 to over a $1000, and surpassed the previous High of $873 established in early 1980.

Thereafter the market dithered around the $873 level, tried to fall back but was robustly supported

WEEKLY CONT. CHART

The dithering around $873 created a continuation Head and Shoulders pattern which has completed in the last week.

The bulls are triumphant.

But how high can the market go for here?

DAILY DEC09 CHART

Note well the difference between targets ...
... and resistances
First stop then for the bulls looks to be 1106. But if as we expect, the market goes higher there are other level to watch.

Yet, in the very short term ....

DAILY DEC09 CHART

It is worth noting that in the very short-term, the current price of December Gold is 1046.70 having peaked yesterday at 1062.70 - a faction above the Dec09 Prior High in March 2008 of 1060.00.

(We are currently Long Gold in our Key Trades portfolio and will be following the market closely.)

Mark Sturdy
Seven Days Ahead

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Sugar Bears Now Up Their Game

The Commodity Specialist view - Following our 17th Sep Update on Sugar the outlook has remained bearish, on the back of a Key Reversal Week. The signal has proved a good one, with the next bear leg looking to have gotten under way.

• WEEKLY CHART - CONTINUATION: The Key Reversal Day week of early Sep remains the dominant feature here. First notable support on this continuation chart is the old 19.73 2006 high.
• DAILY CHART – MAR-10: After that reversal week we were viewing any s/term bounce as temporary. Now that the 21.95 low 08-Sep low has been revisited we look at lower targets/supports. The first interesting one is around the 20.77 38.2% pullback – there’s a Fibo projection just below at 20.63. Then, note the 1.618 swing projection off prior 21.95-25.43 bounce, at 19.80, RIGHT AT THAT OLD 19.73 HIGH ON THE CONTINUATION CHART. In the up-coming Commodity Specialist Guide we’ll look at a couple of closer supports too. And in the Guide we are theoretically short at 24.50, targeting partial profits at 21.25, stops already tightened to 25.50. Further profit-taking is probably favoured towards that 19.80/73 area.

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Will EUR/GBP Bulls Pause For Breath?

The FX Specialist view - An impressive upmove in EUR/GBP has shaken off medium term bear risk, we believe – any pullbacks now will most likely be temporary/corrective ahead of further upside. It is worth looking at the current technical position, and supports to any slip back.

• WEEKLY CHART: Earlier this year we said there was greater bear risk, following the erosion of the 38.2% pullback level. However, failure to hold below this, and subsequent impressive recovery – including breach of the bear channel top projection which implies serious loss of former bear momentum, has definitely tilted the scales in favour of bulls once more.
• DAILY CHART: Price action has now reached, and paused at, the 61.8% recovery level, finding support from near old 0.9082/72 highs (and just through the 23.6% pullback). Bulls will be targeting the higher 76.4% retracement but we just wonder if the s/term chart structure allows for a further pullback attempt prior to a move to the higher levels. (There is a small negative divergence on the RSI too, not shown) At this stage we would not be looking for a deep pullback – the 0.8976 38.2% area would be the first focus of attention. And the fact that price had dropped back into the old bear channel would not harm the overall bullish outlook in any way.

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Bear Pressure Mounts in EUR/JPY

The FX Trader’s view - Over the last few months the price action in EUR/JPY has been on the choppy side, with the 2009 recovery slowing ahead of a 50% retracement level. The Daily chart now appears to be on the cusp of giving a bear signal, which would further postpone any test/break of this key resistance.

• WEEKLY CHART: This year’s recovery earlier had the 141.00 50% level in its sights (coincides with two prior high areas from 2003/2004) – it remains elusive for now and there is currently bear risk.
• DAILY CHART: The key support at/above the 129.75 76.4% level has now come under pressure (including today) –in the FX Specialist Guide we have said that a break/close below this would be an initial bear signal/trigger now. The recent failure at the 135.53 21-Sep high, back to the rising support line is, in fact, an early bear sign. The first bear target would be the 125.63 50% retracement. Initial support may well be found here, but subsequent move lower could close in on the 118.45 76.4% retracement before next decent support emerges. Only a recovery/close above that 135.53 high would shrug off current bear risk.

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The Surging Gilt

The Macro Trader’s view:

The Gilt has remained well-supported over recent months despite some of the worst public sector borrowing data ever seen, and certainly in peace time. In recent days it has begun to surge -in line with or even better than other bond markets What then, as we have asked before, keeps this market up?

Apart from the Bank of England’s QE program, what other special quality does the gilt posses that allows the UK government to push the debt to GDP ratio from around 39% to a projected 70% in such a short period of time?

For sure, these are difficult times and this recession in many ways has been like nothing else in living memory. But usually when economies start to recover, government bond yields start to rise as investors begin to seek greater rewards in other asset classes, usually equities. Moreover, the fear of collapsing growth is replaced by concerns that inflation may rear its ugly head if monetary policy isn’t tightened in a timely manner.

Right now in the UK official interest rates are effectively at zero and the Bank of England has printed £175.0B of new money. That is money that hasn’t been created as a result of an increase in productive capacity, but by turning on a printing press. This has been done with the sole aim of warding off deflation and encouraging inflation.

But the UK economy is showing definite signs of improving, with the housing market apparently springing back to life and the dominant service sector of the economy recording expansion for several months, via the PMI Services survey. But still the Bank seems far from tightening policy as policy makers are suspicious the recovery may yet prove a false dawn.

In addition, the Bank now seems content to see the value of the Pound slide. This in itself should worry international investors as the money they are investing in UK Gilts is eroding in value, but still the Gilt refuses to bend.

Another consideration is the apparent commitment by this government and the opposition parties to cut public spending by half over four years starting after next year’s general election.

Coming from the opposition Conservative party the pledge seems credible as they have opposed the massive build up of debt and when they were last in government they made difficult choices over public spending. But coming from the incumbent Labour party the pledge is less convincing, unless Gordon Brown has had his own equivalent road to Damascus conversion - which we do not believe.

More likely, the markets too are sceptical of the UK economic recovery and continue to prefer the relative safety of UK government debt which remains AAA rated. Their reasoning may be that if the UK government defaults, then other asset classes and sovereign issuers are likely to be in a similar predicament and with inflation looking tame and expected to remain so for quite some time, at least by the Bank of England, they see little risk in holding Gilts.

But what if the recovery in the housing market proves durable? What if the PMI Services survey is accurately predicting the strength of the recovery? What if the Bank of England is wrong and they have pumped too much liquidity into the economy? The Bank will have to act fast and aggressively with policy and this market together with Short Sterling will be a big sell.

In the US in less than a week two prominent Fed members have briefed about the need for the Fed to act before action appears needed. In the Euro zone the ECB has reported a substantial drop in the liquidity demands of Euro zone Banks.

In short, the global economic environment is improving and that includes the UK so Gilt traders might just be sleep walking towards the edge of a cliff.

The Technical Trader’s view:

DAILY CHART
The monthly continuation chart’s structure is clear enough: a clear trading range, within which the market has found support at the Prior High at 115.08. Look closer.

DAILY DEC 09 CHART
The December chart makes a convincing case that the market may go further still. The bull falling wedge has completed, and the market has overcome the Prior High at 118.87 in some style.

Use that band 118.42- 118.87 as good support on any pull-back….

The market looks well-set short-term yet still remains within a well-defined trading range in the medium-term.

Mark Sturdy, John Lewis
Seven Days Ahead

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Brent Crude Oil – Initial Bear Signal in Place

The Commodity Specialist view - During the summer months Brent Crude Oil bulls got a second wind, but have recently struggled near to resistance on the long term chart. An initial bear signal was given last week, and we now look for the confirming move.

• WEEKLY CHART - CONTINUATION: The 38.2% recovery level has proved a tough hurdle to pass, and remains first key resistance on this long term chart. The recovery from the late Dec-08 low shows signs of maturity now, so a decent pullback at this stage would not be a surprise.
• DAILY CHART – NOV-09: The break/close below both the main rising support line and 66.66 04-Sep low was a clear bear signal. We had thought that the dual Fibo support could prompt a s/term bounce, hence we did not want to chase the market. In the Commodity Specialist Guide we were sellers on a bounce, at 68.75, just ahead of the old rising support/return line, with initial stops just above the 72.20 17-Sep high. A better break of recent support, and the channel base projection just below, would be useful bear confirmation now, with 61.00 targeted for partial profits. A later target centers on the 61.8% level. The current bear signal would be negated on a recovery back through that 72.20 high.

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Does the Bank want a weak Pound?

The Macro Trader’s view:

After a steep sell off against both the Dollar and the Euro in the wake of the financial crisis, the Pound began to bottom out during the 1st quarter of this year, as it became evident that other G7 economies were doing as badly as the UK, if not worse.

As the 2nd quarter evolved, and data began to steady, with the PMI services survey showing solid improvement away from the lows, expectations turned towards an early UK economic recovery, which was borne out by improving data coming from the housing market.

Where only a few months earlier, analysts were predicting the housing market correction would extend into 2010, suddenly the Nationwide and Halifax house price surveys were throwing out readings showing sporadic month on month price increases. While at first these were dismissed as a blip, subsequent reports have confirmed the housing market is in a recovery. However, the optimism over the UK economy took a serious knock when Q2 GDP released in July, came in much worse than expected, albeit a big improvement on Q1 and Q4 2008.

The Pound began to consolidate its recent gains, even though business investment showed unexpected weakness too. But what has worked against the Pound over the last 6 to 8 weeks is the Bank of England.

After initially announcing at the July MPC meeting, there would be no increase of its QE program, against market expectation, policy makers reversed their decision in August, but not only did they increase QE, but by double the amount expected; £50.0B instead of the £25.0B anticipated. This knocked the Pound against both the Dollar and the Euro, but worse was to come. In spite of a continuous steady stream of data showing the economy recovering, the August Bank of England quarterly inflation report, once more sought to play down the obvious, albeit fledgling, economic recovery, once again undermining Sterling.

More was to come, King has recently publicly flirted with the idea of reducing interest paid on Bank balances held at the Bank of England, as a means of forcing the Banks to stop hoarding cash and lend it. This hasn’t yet been implemented, and recent minutes show no discussion has been held, but the market having been surprised twice during the summer, took the rumours seriously and again the Pound suffered as such a move was considered another form of monetary easing.

However, after no surprises were sprung by the recent September meeting or minutes, the Pound again tried to recover, but once again governor King has popped up and in an interview has intimated the Bank would be comfortable with a weaker Pound. While this has merits for the much reduced manufacturing sector, it acts to drive up import costs, especially oil, which has enjoyed a strong rally over recent months, and acts to offset domestic disinflation.

King may see this as a means of holding deflation at bay, but the official CPI stands at 1.6%, against a target of 2.0%, so hardly deflation.

We judge the Bank is trying to hold down the value of Sterling as a means of providing monetary stimulus, while making UK assets look attractive for foreign investors, but for traders a strong Pound looks a thing of the past.
Mark Sturdy,John Lewis
Seven Days Ahead
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US Dollar Index – What the Bulls Need To Happen

The FX Trader’s view - Over the last few months the Dollar Index has been grinding lower, recently reaching a Fibonacci projection we had been looking at. However, there is nothing bullish about the daily chart yet – there are certain hurdles that bulls need to get round before a recovery phase can be trumpeted.

• MONTHLY CHART: The earlier breach of a bear channel top projection suggested to us that long term downward momentum was on the wane. When a new trend is trying to develop, a deep initial pullback is quite usual. Here the 76.4% level just above 75.00 offers support.
• DAILY CHART: Our Fibo projection has been tested/eroded now (on some other charts of currency pairs it hasn’t worked so well, except as a minimum target, not as resistance/ support). Immediate resistance is offered by the prior 77.428/77.688 lows. But bulls need to see a close above the s/term bear channel top projection at 78.25 just now, for an initial signal. Then, a further break through the 23.6% recovery level of the whole decline from Mar 89.624 high, just above 79.00, would provide bullish confirmation. We would then target the 81.466 Jun high area, which lies near to the 38.2% level (which relates to our Fibo projection).

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EUA Carbon Emissions – How Far for the Bears?

The Commodity Trader’s view - Since we introduced the EUA contract to the Commodity Specialist Guide in July the market has been recovering towards its May peak of 16.00. However, recently a clear break of uptrend has favoured the bears, but key support may not be far off.

• WEEKLY CHART - CONTINUATION: The 38.2% recovery level has proved a tough hurdle to pass, and remains first key resistance on this long term chart. However, we think that shorter term weakness will prove temporary and we have identified two key support areas – see below.
• DAILY CHART – DEC-09: The break of uptrend and small channel base were clear bear signals – currently s/term rallies are still viewed as temporary. A close below the old 13.00 38.2% pullback level will be the next bear sign, but the first of two key supports then lies not far away – the 12.00 area which encompasses the 50% pullback, bear channel base projection and a Fibo projection just below. We would expect at least temporary support from this. Lower down lays 10.22/9.93 (another Fibo projection and 76.4% level) – this becomes next bear target if the 12.00 area fails. In the Guide we have tried to sell on suitable rallies towards the 14.66 02-Sep low, but have not had the satisfaction – but currently we are still sellers on suitable rallies.

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EUR/GBP Bulls Bolstered By Break of 88.00 Barrier

The FX Trader’s view - Bulls in EUR/GBP have taken their time to emerge, much of Jun/Jul/Aug marked by a consolidation phase. We had tended towards a positive resolution of this, and there is scope for this cross rate to move higher shorter term.

• WEEKLY CHART: The 38.2% pullback level was violated earlier this year, suggesting that the 2009 bear move had more to go. This can still be the case but, shorter term, good support has emerged from the rising support line, and we must go with the trend. Check out the Daily chart for more detail.
• DAILY CHART: After good support was found from the 0.8700 Jul high area temporary resistance came from our first target around 0.8800/15 – included a 38.2% level and falling resistance line. There has now been a clear break above and the next hurdle at 0.8945 has also been overcome – we weren’t sure if this would be, but the current chart structure shows no immediate sign of bull fatigue. Next stop? The dual retracement area of 0.9072/0/9100, which coincides with old Feb/Apr highs at 0.9072/82. Combined with the bear channel top projection above, at 0.9150, this area should be tough to crack (but a clear break would force us to reassess medium term bear risk).

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The S&P – how much further?

The Macro Trader’s view:

The recent rally in the S&P 500 really is looking like the birth of a new bull market. This, after a period during which the market rallied on scattered signs that the recession might be ending, interspersed with corrections lower as other data suggested a false dawn. Now data has begun began to point more firmly towards economic recovery.

The Fed has tried to play down these early signs by talking up the downside risks to the economy that remain. It has also pledged to keep monetary policy at exceptionally low levels for an extended period.

But over recent weeks the housing market has shown clear improvement, indeed the last two New Home sales reports showed a month-on-month increase in excess of 9.0%. Just as the housing market led the US and global economy into recession, traders and economists are have been looking to it to lead the economy back to growth.

But two other key ingredients needed to fall into place before they could be certain:1. The Business inventory cycle has yet to turn, and2. Consumer demand which accounts for over two thirds of GDP needed to turn too.

As regards consumer demand, this week the US retail sales report turned unambiguously bullish. A strong report was anticipated on the back of the US government’s cash for clunkers scheme, but the report exceeded all expectations. The headline report came in at +2.7%, but of greater importance, the Ex-Autos report came in at +1.1%. This signals the consumer is spending money and the economy is not only on the mend, but as Fed Chairman Bernanke said yesterday ”the economy is likely already out of recession”.This is great news for stocks as corporate profits should begin to strengthen and drive equities higher.

Indeed, if any further evidence was required that the economy is bouncing back, that came last week in the shape of the US trade report: the trade deficit came in much wider than expected driven by a record increase of imports. This shows demand is strengthening and, as the economic activity begins to pick up further, we judge the trade deficit will grow too.

In all the equity markets look an exciting place to be and we think the rally is only at an early stage.

The Technical Trader’s view:

MONTHLY CHART

The full majesty of the monthly chart is really to be found in the creation of a massive trading range.

Note too, within that range, the power of the rally that drove the market up through the 38.2% Fibonacci resistance at 1012-18.

Look closer still.

WEEKLY CHART

The creation of a Head and Shoulders Reversal at the lower boundary of the trading range is the current driving force behind the current rally.

Note well the minimum target of the Head and Shoulders pattern (adjusted for the log scale) – just short of the 1253 low resistance, and close by the Neckline of the H&S pattern that drove the market down in the first place.

For choice we feel that the band1201 -1253 would be a good profit-taking area. As this is being written we are currently trading 1063

Mark Sturdy, John Lewis
Seven Days Ahead

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Sugar’s Recent Key Reversal Week Tempts Bears

The Commodity Trader’s view - At the beginning of September, following a significant bull run, a sharp sell-off produced a Key Reversal Week, heralding the end of the likely end of the bull phase and start of a medium term bear phase.

• WEEKLY CHART - CONTINUATION: The Key Reversal Week is clear – the risk is now to the downside. Note how the old 19.73 2006 high exactly coincides with the 38.2% pullback level on the Oct chart below – some sort of support is likely at/above here.
• DAILY CHART – OCT-09: After the bull run failed at our Fibo projections the recent trading below the 23.6% pullback level and 21.22 21-Aug low provided a further bear signal/trigger. As noted above, the 38.2% pullback coincides with the old 2006 high – a future support area. S/term rallies are likely to be corrective/temporary only, ahead of another bear leg –first potential resistance lies at/below the 23.33 12-Aug high.
• In the Commodity Trading Guide we are sellers on rallies, and currently favour the 23.00 area (ahead of that 23.33 high and a 61.8% bounce). Stops ideally will be around 25.00, just above 24.85 high. Partial profits targeted at 20.00, stops then tightening to cost to improve risk/reward. In the Mar contract this equates to 24.50 entry, 26.50 stop, 21.00 initial target.

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UK Gilt market’s uncertainty

The Macro Trader’s view:

‘The Gilt is a government bond market that is dogged by an unprecedented build of peacetime debt, supported by the Central Bank.’ Discuss.

Since the highs made at the end of August, fuelled mainly by the Bank of England’s series of QE policy surprises, the gilt has corrected lower during September. This has been due in part to the release of further data which has emphatically supported the UK economic recovery argument but also it has fallen because of raised questions over the need for QE.

Indeed, only this week UK manufacturing output, industrial production and the NIESR GDP estimate have all pointed towards the UK finally emerging from recession after the disappointment of the Q2 GDP data earlier in the summer. And yesterday’s NIESR estimate fuelled a heavy sell off in the Gilt as it turned positive. Though that was reversed today.

Why, you may ask, would the NIESR estimate cause a selloff? Surely if the build up of debt has been a function of the recession, any sign that it is now ending, will result in the deficit coming back under control and thus eventually restrain debt levels.

The problem is that the debt build-up has been so large that any recovery cannot cure the problem by itself. If correction was left only to recovery, inflation would result, with much higher yields, further compounding the problem.

What is needed is a clear plan to cut spending supplemented by some tax increases, but that isn’t likely until after the next general election due in 9 months time. But for now, traders are unwilling to aggressively sell the Gilt, due to the Bank of England’s presence in the secondary market, holding it up. That is in spite of the normal response to economic recovery accompanied by low interest rates, expansion of the monetary base (QE) and an enormous fiscal stimulus would be to begin driving yields higher in anticipation of inflation.

The gilts have a Teflon quality, bestowed upon them by the Bank of England’s Quantum Easing program which resists such moves. So the government is afforded the luxury of lower yields than would otherwise be expected.

Our view of the gilt is that it is a market waiting to be sold. The selling in earnest will begin once the Bank’s QE program is concluded. By then, recovery will have become an established fact and the outlook for inflation clearer.

And that will pose a significant and premature threat to the economic recovery because the Bank of England is not prepared to tighten in a timely and aggressive manner so as to counter a loose fiscal stance.

The Technical Trader’s view:

MONTHLY CHART
The long-term chart has very clear parameters. The second failure at the 124.95 High is clear. And the support from the 116.08 Prior High sets the range. For the moment the smaller range remains intact.

DAILY CHART
But when the daily chart is examined subject to those parameters, some uncertainty enters.
The double bounce of the 116.05 Prior High was bullish.
But the short-term test will be the support from the two prior Highs where – we are right now.
That is of course a possible neckline of a Head and Shoulders Reversal.
Watch carefully to see if it holds. If it doesn’t, expect a rapid retest of the 116.05 lower boundary. Watch and wait for clarity.

Mark Sturdy, John Lewis
Seven Days Ahead

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